A.M. Best Updates Outlook to Positive for ACE and Most of Its Subsidiaries [Professional Services Close – Up]

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength ratings (FSR) of A+ (Superior) and issuer credit ratings (ICR) of "aa" of the North America property/ casualty subsidiaries of ACE Limited, ACE Bermuda Insurance, ACE Tempest Reinsurance (ACE Tempest Re) (both domiciled in Bermuda), the members of the ACE American Pool and ACE INA Insurance (Canada).

In a release on June 14, the Company noted that it has also revised the outlook to positive from stable and affirmed the FSR of A+ (Superior) and ICR of "aa" of ACE Tempest Re's parent, ACE Tempest Life Reinsurance (ATLRE) (Bermuda). Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the ICR and senior debt ratings of "a" of ACE and its downstream holding company, ACE INA Holdings Inc., whose debt is fully guaranteed by ACE.

In addition, A.M. Best has upgraded the FSR to A+ (Superior) from A (Excellent) and the ICR to "aa-" from "a+" of Combined Insurance Company of America (Glenview, IL) and Combined Life Insurance Company of New York (Latham, NY) (Combined companies). Additionally, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of "a-" of ACE Life Insurance Company (Stamford, CT). The rating outlook for these life and health companies is stable.

The ratings for ACE's core property/casualty operations reflect their strong risk-adjusted capitalization, diversified global operation enhanced by prudent acquisitions over the past few years, and historically favorable record of generating strong earnings and cash flows. ACE's core property/casualty operations' balance sheet is strengthened by controlled financial leverage, a relatively conservative investment portfolio that generates stable earnings and favorable loss reserve development in recent years. The positive rating factors are derived from management's experience and consistent focus on underwriting profitability generated by effective risk selection and pricing standards, and maintenance of appropriate policy limits and exposure to catastrophes, including the use of reinsurance to manage net retentions. ACE's strong enterprise risk management (ERM) program relies on close collaboration of executives and operating departments to identify, assess and control enterprise risk and accumulations. The effectiveness of the ERM program is demonstrated by risk-adjusted capital levels and overall earnings that have remained strong through soft market conditions, the global financial crisis and the increase in global catastrophe and weather-related events.

Continued competitive pricing in the market, combined with a lower level of reserve redundancies and investment returns, require ACE to remain focused and diligent in executing pricing discipline, product and risk selection capability, and managing exposure levels to generate continued positive underwriting results. Other offsetting rating factors include the group's exposure to emerging asbestos and environmental claims and natural and man-made catastrophes. The operating companies' capital is also exposed to varying dividend demands and higher than industry average ceded reinsurance leverage, driven by the nature of its business, its agricultural and captive/cash flow programs, and recoverables relating to its run-off book.

At December 31, 2012, ACE's adjusted debt-to-total-capital level was 16.5 percent (excludes AOCI), which is within A.M. Best's expectations at current rating levels. Interest coverage also remained favorable. Since ACE maintains substantial capital levels in its Bermuda-based operations, little cash and liquid securities are held at the ultimate holding company level. Therefore, holding company cash flows necessary to meet shareholder dividend and debt service requirements are principally met through dividends from the operating companies. Given the significant holding company cash flow requirements, there is a dependence on subsidiaries in multiple jurisdictions to provide sufficient dividend cash flow.

The ratings of ATLRE reflect the company's ownership of ACE Tempest Re, which accounts for the majority of the company's financial profile and the benefit of being part of the ACE Limited organization. Partially offsetting these positive rating factors is the potential capital and operating volatility associated with ATLRE's run-off variable annuity reinsurance business as well as its limited life reinsurance operations.

Although it is a very limited contributor to the ACE group of companies, ACE Life Insurance Company's ratings recognize its stable capitalization, along with a very conservative investment portfolio that offers adequate liquidity to support the run-off of its remaining U.S. life reinsurance business. Offsetting rating factors include its nominal scope of operations and business profile, which is currently in run-off, and earnings volatility.

The rating actions of the Combined companies reflect the benefit the companies receive as members of the ACE Limited organization, its consolidated financial strength, operating profile, established niche in the middle-income market for supplemental individual accident and health products, and the level of risk-based capital maintained at both entities.

Factors that may lead to positive rating actions for ACE and its operating companies include continued strong underwriting and operating performance that outperforms peers over time. However, factors that could lead to negative rating actions include operating performance falling short of A.M. Best's expectations or an erosion of surplus that causes a decline in risk-adjusted capital to a level that no longer supports its current ratings.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides an explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process.

A.M. Best Company is an insurance rating and information source.

More information:

www.ambest.com

www.ambest.com/ratings/methodology

www.ambest.com/press/061403acelimited.pdf

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